Wesfarmers is looking to demerge its Coles supermarket division and spin it off as a separate ASX-listed unit under a new plan from managing director Rob Scott.

In a release to the ASX on Friday morning, Wesfarmers said the decision, subject to shareholder and other approvals, follows a review of the conglmerate’s portfolio and an assessment of the composition of its capital employed.

The demerger would include Coles national network of 806 stores, as well as Coles Online, 894 liquor stores, Coles Express’ 712 fuel and convenience store outlets and 88 hotels under the Spirit Hotels brand.

Wesfarmers has proposed maintaining a minority ownership interest in the spun-off Coles venture of up to 20 per cent, and also intends to support strategic alignment between the two businesses in relation to various data and digital growth initiatives.

The company anticipates a Coles float would create a new top 30 company on the ASX.

Wesfarmers also announced that Coles managing director John Durkan will step down later this year after 10-years at the helm of the supermarket chain, to be replaced by Steven Cain, who is currently the chief executive of supermarkets and convenience at Metcash.

Scott said the move would free up Wesfarmers’ resources to focus on its other businesses, and reflected Coles’ position as a cash generative business.

“We believe Coles has developed strong investment fundamentals and is of a scale where it should be operated and owned separately,” Scott said.

“A demerger of Coles will facilitate greater focus by Wesfarmers on growth opportunities within its remaining businesses and the pursuit of value accretive transactions. The capacity to act opportunistically will be retained through a strong balance sheet and a cash generative portfolio.”

As of 31 December 2017, Coles accounted for around 60 per cent of Wesfarmers’ capital employed, and 34 per cent of its group divisional earnings.

Wesfarmers purchased Coles in 2007 and has spent the last eleven years turning around the business, although in the last twelve months the chain has stumbled in the wake of a resurgent Woolworths.

Coles booked comparable food sales growth of 1.4 per cent in the December quarter, compared to 5 per cent comp growth booked by Woolworths.

The demerger is subject to final board approval, third party consents as well as regulatory and shareholder approvals, but is slated for FY19 if stakeholders agree with the plan.

Under the scheme Wesfarmers shareholders would receive shares in Coles proportional to their existing Wesfarmers holdings, taking into account shares with will be retained by Wesfarmers itself.

Wesfarmers’ remaining operating divisions includes Bunnings, Kmart, Officeworks, plus its Industrials portfolio.

Coles MD moves on

Durkan (pictured) has been at of Coles for most of its tenure under the Wesfarmers umbrella, but will now move on as the business embarks on its “next chapter”.

His replacement, Cain, has spent the last two-years at Metcash, but has prior experience in the UK-supermarket business as the former group managing director of Asda.

Cain has also worked at Bain & Co and UK-based retail group Kingfisher plc and was an advisor to Wesfarmers on its takeover of Coles Group in 2007 as Coles Myer’s managing director of food, liquor and fuel.

“Steven brings a wealth of experience in international and Australian retailing with organisations such as Asda, Kingfisher, Coles and Metcash,” Scott said.

“This, combined with his experience as a listed company CEO, positions Steven well to lead Coles post the demerger.”

Scott also thanked Durkan for his service at the helm of Coles.

“The fact that food at Coles has been in deflation for eight consecutive years is in no small part due to John’s determination to provide Australians with great quality food at great value,” Scott said.

“Under his leadership we have also seen the turnaround of Coles Liquor, a business that was in structural decline for many years, a much improved convenience offer through Coles Express, the establishment of the $50 million Coles Nurture Fund, the transformation of a number of key digital enablers across our store network, supporting the exponential growth of Redkite and SecondBite, and myriad initiatives to attract and retain great talent, including establishing one of the largest graduate programs in Australia.”

More to come…